'RBI should allow the rupee to appreciate' : SBI report
SBI report says it will curb import inflation amid rising domestic inflation and supply disruptions
Given the rising domestic inflation amid supply disruptions, the RBI should allow the rupee to appreciate, as it can reduce imported inflation with the rising metal and oil prices and clear the liquidity overhang to some extent, according to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
“With CAD [current account deficit] at a comfortable situation and an extremely unlikely devastating third Covid [wave], the Indian rupee is going to handle any taper news with relative calm,” Ghosh says in the latest edition of SBI’s research report Ecowrap
The rupee saw a tumultuous 2020, with the news of Covid-19 pushing the exchange rate down rapidly. However, the rupee started gaining strength as India saw a current account surplus and foreign investors maintained faith in the economy by pouring in capital. RBI had continuously made forex purchases. In FY21, RBI purchased ₹5.1 trillion worth of forex and its forex reserves swelled by $103.72 billion. Despite the second wave of Covid-19, the rupee gained strength and even went below 73 per dollar,” Ghosh added.
However, recently the rupee went from 73.09 per dollar on September 1 to a low 75.52 on October 12. It has since started appreciating and is currently at around 75. If we look at the turnover in the forex market, there has been an excess supply of dollars at $2.2 billion in August 2021. This shows that the appreciating bias on the rupee remains.
The September 2021 merchandise trade deficit at $22.59 billion is quite high and has the closest counterpart in October 2012, at $20.21 billion. But it must be remembered that trade data shows seasonality and a jump in imports and exports is fairly common at every quarter-end month, Ghosh said.
So far, India’s exports have been doing quite well. India’s merchandise exports in April-September 2021 were valued at $197.9 billion — a robust increase of 24.3 per cent over $159.2 billion in April-September 2019. In composition terms, engineering goods are the most valued. India has also seen a considerable increase in products like cereal preparations, cotton, electronics. drugs, and chemicals. “Thus, achieving the target of $400 billion is not a pipe dream and this will provide a strong cushion to the current account balance, even if the oil import bills rise rapidly. Taking everything into account, our CAD projections stand at (-)1.4 per cent. India is also witnessing robust FDI inflows, even if the FPI flows are showing some volatility,” Ghosh added.